…the ambitious plan for the new free-trade zone — nicknamed Zip
Choluteca — rests on a controversial low-wage pact, made in the spring
among the project’s developers, the Honduran government and national
labor unions. In return for luring investors to an untested and
undeveloped region, the agreement guarantees them a minimum profit by
keeping wages below the legal daily minimum for five to 10 years.
Here is the full story, which is about recent attempts to make Honduras a regional economic powerhouse.
Do maximum wage laws make more or less sense than minimum wage laws?
Both are infringements on liberty and, thus, illegitimate.
Neither. They make the same amount of sense. Minimum wage makes workers at the low end of the scale less attractive to employers, who may find it cheaper to substitute capital. Maximum wage laws make employment at the low end less attractive to workers, who may find it cheaper to substitute scratching their [** CENSORED by DHS **] for getting a job.
What did I win?
Maximum wage laws make less sense if what you care about is maximizing the surplus of your own citizens. A minimum wage at least has the potential to increase average surplus (or the cost is lessened) because those lucky enough to get a job get paid more. With a maximum wage you get lower employment and a lower wage, which is going to be strictly worse.
That said, a maximum wage won’t accidently give jobs to workers on the far right of the demand curve, but I think that can’t outweigh unless the demand curve is concave.
Minimum wage laws at least may be designed to encourage “efficiency wages”, dubious but possible. A maximum wage law would then combine disequilibrium with “inefficiency wages”… wow…
There are several historical examples I can think of, for the maximum wage. The price controls of WWII and the 1970s, as well as some early puritan American colonies. The (predictable) response is that employers find ways to compensate employees in ways that don’t count as a “wage”.
So I don’t see how meaningful this wage cap is going to be if foreign investors suddenly find they have to offer more to get workers to show up.
Kyle: If you can get a functioning futures or forward market in labor, you will win the Nobel. They would be very nice to have, but run into enforceability problems. You end up having to compel performance if the contract is “in the money”. And even if the legal system will play along, the worker will probably just do shoddy work, making the contracts hopelessly difficult to adjudicate.
Living in Honduras, I can tell you that the standard minimum wage isn’t enough for one person to live on, much less a family. The 20% reduction in Choluteca is a travesty which will only make the rich richer. But jobs are so hard to come by that people will take them anyway.
The companies that come here are competing with China. The only way they can do that is to treat the employees like they are treated in China.
BTW, the money received by the government goes into the pockets of the rich politicians and only pennies on the dollar ever makes it to the poor.
Good discussion.
Kyle: I agree with your analysis. If you wanted to hedge against labor costs, it would make much more sense to have some kind of “prediction market” keyed to some publicly available index, in which fulfilment of the contract would not actually involve purchase of labor, just an insurance-like payout.
Incidentally, are there barriers preventing workers themselves from doing something like this as insurance against e.g. declining wages due to globalization?
Living in Honduras, I can tell you that the standard minimum wage isn’t enough for one person to live on, much less a family. …But jobs are so hard to come by that people will take them anyway.
How do people live then?
Or is the answer that they don’t?
hi
Maximum wage caps are indeed an ‘infringement’ on the magical Free Market. Trying to enact a solid cap (say at 10 million $ a year) would never be passed while the fat cats have Congress in their pockets.
A better solution might be the Ben-And-Jerry’s model—the top-payed position can only earn X times what the lowest-paid worker does (benefits included!). Thus before Jenkins the CEO can vote himself another salary increase, he first has to raise the pay of Joe the Janitor. This prevents massive financial abuses whereby the company gets the gold mine while the worker drones get the shaft. Want an example? Look no further than Wal-Mart.
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